Rewriting the Income Tax Act: Exposure Draft
Part D: Deductions
12/10/18
Part D – Deductions
DA – General rules 1
Rewriting the Income Tax Act: Exposure Draft
Part D: Deductions
DA – General rules
Index
DA1General permission
DA2General limitations
DA3Effect of specific rules on general rules
DA4Treatment of depreciation loss
DA1General permission
Nexus with income
(1)A person is allowed a deduction for an amount of expenditure or loss to the extent to which the expenditure or loss is—
(a)incurred by them in deriving their counted income; or
(b)incurred by them in carrying on a business for the purpose of deriving counted income.
General permission
(2)Subsection(1) is called the general permission.
Origin:(1) BD 2(1)(b)(i), (ii).
(2) new.
Defined terms:amount, business, counted income, deduction, derived,general permission, incurred, person.
Comment:As noted in the general commentary, the drafting of subsection(1) reflects the current section BD2(1)(b) and authorises a deduction only to the extent to which counted (formerly gross) income is derived. In view of the exempt income limitation in draft section DA2(3), it may not be necessary for the rewritten section to take this approach. It may be sufficient to authorise a deduction if there is a nexus with any income. Comment is sought on this suggestion.
Subsection(1)(b) is, arguably, superfluous.
DA2General limitations
Capital limitation
(1)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature. This rule is called the capital limitation.
Private limitation
(2)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature. This rule is called the private limitation.
Exempt income limitation
(3)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving exempt income under subpartCW (Exempt income). This rule is called the exempt income limitation.
Employment limitation
(4)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.
Withholding tax limitation
(5)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving schedular income subject to final withholding. This rule is called the withholding tax limitation.
Indemnity limitation
(6)A person is not allowed a deduction for an amount of expenditure or loss to the extent to which it is recoverable under insurance or a right of indemnity. This rule is called the indemnity limitation.
Relationship of general limitations to general permission
(7)Each of the general limitations in this section overrides the general permission.
Origin:(1) BD 2(2)(e).
(2) BD 2(2)(a).
(3) BD 2(2)(b).
(4) BD 2(2)(c).
(5) BD 2(2)(d).
(6) DJ 1(c).
(7) new.
Defined terms:amount, capital limitation, deduction, derived, employment limitation, exempt income, exempt income limitation, general limitation, general permission, income from employment, incurred, indemnity limitation, private limitation, schedular income subject to final withholding, withholding tax limitation.
DA3Effect of specific rules on general rules
Supplements to general permission
(1)A provision in any of subpartsDB to DZ may supplement the general permission.
Relationship of general limitations to supplements to general permission
(2)Each of the general limitations overrides a supplement to the general permission unless the provision creating the supplement expresslystates otherwise.
Relationship between other specific provisions and general permission or general limitations
(3)A provision in any of subpartsDB to DZ may override any one or more of—
(a)the general permission:
(b)the capital limitation:
(c)the private limitation:
(d)the exempt income limitation:
(e)the employment limitation:
(f)the withholding tax limitation:
(g)the indemnity limitation.
Express reference needed to supplement
(4)A provision in any of subpartsDB to DZ takes effect to supplement the general permission only if it expressly states that it supplements the general permission.
Express reference needed to override
(5)A provision in any of subpartsDB to DZ takes effect to override the general permission or a general limitation only if it expressly states either—
(a)that it overrides the general permission or the relevant limitation; or
(b)that the general permission or the relevant limitation does not apply.
No supplement or override in PartE
(6)No provision in PartE (Timing and quantifying rules) supplements the general permission or overrides the general permission or a general limitation.
Origin:(1) BD 2(1)(b)(iii), (2)(e).
(2) new.
(3) new.
(4) new.
(5) new.
(6) new.
Defined terms:capital limitation, employment limitation, exempt income limitation, general limitation, general permission, indemnity limitation, private limitation, withholding tax limitation.
Comment:The reference in draft subsection(6) to PartE (Timing and quantifying rules) will need to be expanded to cover later parts as they are rewritten.
DA4Treatment of depreciation loss
Depreciation loss subject to general rules
(1)For the purposes of applying the general permission and general limitations, an amount of depreciation loss quantified under subpart EF (Depreciation) for an item of property is treated as if it were actually a loss.
Capital limitation not applying automatically
(2)However, the capital limitation does not apply to such an amount of depreciation loss merely because the item of property is itself of a capital nature.
Origin:(1) BD 2(1)(a).
(2) BD 2(1)(a).
Defined terms:amount, capital limitation, depreciable property, depreciation loss, general limitation, general permission.
Comment:Consideration is being given to whether the term ‘loss’ should be defined to include amounts of depreciation loss generally.
DA – General rules 1
Rewriting the Income Tax Act: Exposure Draft
Part D: Deductions
DB – Specific rules for expenditure types
Index
Taxes
DB1Taxes and penalties (other than goods and services tax)
DB2Goods and services tax
DB3Determining tax liabilities
DB4Chatham Islands dues
Financing costs
DB5Transaction costs: borrowing money for use as capital
DB6Interest
DB7Repayment of debt sold at discount to associate of debtor
DB8Money borrowed to buy shares in group companies
Security arrangements
DB9Security payment
DB10Sureties
Premises costs
DB11Transaction costs: leases
DB12Destruction of temporary building
DB13Payments for non-compliance with covenant for repair
DB14Lessors’ offsetting deduction: payments for non-compliance and change in use
Revenue account property
DB15Cost of revenue account property
DB16Acquiring commercial bills
DB17Acquisition of companies’ own shares
DB18Share losses
DB19Undertakings or schemes involving personal property
DB20Land on revenue account
DB21Major land development begun after 10 years
DB22Changes in permitted use of land
Bad debts
DB23Bad debts
DB24Bad debts owed to estates
Research and development
DB25Scientific research
DB26Patent expenses
DB27Patent rights: devising patented inventions
Index continued
DB28Patent rights acquired before 1 April 1993
DB29Patent rights acquired on or after 1 April 1993
Marketing
DB30Gifts of money by company
Theft
DB31Property misappropriated by employees or service providers
DB32Making good loss from misappropriation by partners
DB33Restitution of stolen property
Pollution control
DB34Preventing pollution of environment
Repayments
DB35Payments for remitted amounts
DB36Restrictive covenant breached
Timing adjustments: stock and prepayments
DB37Trading stock, livestock, and excepted financial arrangements
DB38Adjustment for prepayments and deferred payments
DB39Adjustment for change to accounting practice
Taxes
DB1Taxes and penalties (other than goods and services tax)
No deduction
(1)A person is not allowed a deduction for the following:
(a)income tax:
(b)a civil penalty under PartIX of the Tax Administration Act 1994:
(c)a tax, a penalty, or interest on unpaid tax that is payable under the laws of a country or territory outside New Zealand and is substantially the same as a civil penalty, or a criminal penalty, or interest imposed under the Tax Administration Act 1994.
‘Income tax’ defined
(2)In this section, income tax—
(a)includes—
(i)further income tax:
(ii)a tax imposed in a country or territory outside New Zealand that is substantially the same as income tax:
(iii)imputation penalty tax:
(iv)a dividend withholding payment, further dividend withholding payment, and dividend withholding payment penalty tax:
(v)qualifying company election tax; and
(b)does not include—
(i)fringe benefit tax:
(ii)specified superannuation contribution withholding tax.
Link with subpart DA
(3)This section overrides the general permission.
Origin:(1) DB 1(1).
(2) DB 1(2).
(3) new.
Defined terms:deduction, dividend withholding payment, dividend withholding payment penalty tax, fringe benefit tax, further dividend withholding payment, further income tax, general permission, goods and services tax, imputation penalty tax, income tax, New Zealand, qualifying company election tax, specified superannuation contribution withholding tax, tax.
DB2Goods and services tax
No deduction
(1)A person is not allowed a deduction for the following:
(a)input tax charged, levied, or calculated on a supply of goods and services to a person:
(b)goods and services tax payable by a person to the Commissioner.
Application of goods and services for purposes other than making taxable supplies
(2)Subsection(1) does not apply to output tax charged for goods and services that a registered person is treated as supplying under section21(1) or section21I(1) to 21I(3) of the Goods and Services Tax Act 1985, but only to the extent to which—
(a)the person is allowed a deduction for the expenditure that the person incurs in acquiring or producing the goods and services; or
(b)the person is allowed a deduction for an amount of depreciation loss for the goods and services.
Application of capital asset
(3)However, the exception in subsection(2) does not apply when a capital asset is applied—
(a)for the main purpose of making taxable supplies when the asset was acquired or produced other than for the main purpose of making taxable supplies; or
(b)other than for the main purpose of making taxable supplies when the asset was acquired or produced for the main purpose of making taxable supplies.
Depreciable property
(4)The provisions that apply when an amount of depreciation loss is quantified by reference to the cost of an item of depreciable property to a person are in sectionEF44 (Cost: goods and services tax).
Link with subpart DA
(5)Subsection(1) overrides the general permission. Subsection(2) limits the extent to which subsection(1) overrides the general permission. The general limitations still apply.
Origin: (1) ED 4(2).
(2) ED 4(3)(a), first proviso (c), (d).
(3) ED 4(3) second proviso (e), (f).
(4) new.
(5) new.
Defined terms:amount, Commissioner, deduction, depreciable property, depreciation loss, general limitation, general permission, goods, goods and services tax payable, input tax, output tax, person, registered person, services.
DB3Determining tax liabilities
Tax-related expenditure
(1)A person is allowed a deduction for expenditure that they incur in connection with the following matters:
(a)calculating or determining their income tax liability for an income year:
(b)calculating or determining the goods and services tax payable by them in a taxable period:
(c)preparing, instituting, or presenting an objection or challenge to, or an appeal following, a determination or assessment made under this Act, the Tax Administration Act 1994, or the Goods and Services Tax Act 1985:
(d)making a contribution towards the expenditure incurred by another person if—
(i)the other person is allowed a deduction for that expenditure; and
(ii)the expenditure relates to a matter affecting the determination of the first person’s liability for income tax or goods and services tax; and
(iii)the first person has objected to, challenged, or appealed against an assessment or determination made in relation to the matter under this Act, the Tax Administration Act 1994, or the Goods and Services Tax Act 1985.
This subsection is overridden by subsection(2).
Exceptions
(2)Subsection(1) does not apply to expenditure that a person incurs in connection with the following matters:
(a)a matter arising from a return of income or a return under the Goods and Services Tax Act 1985 that was fraudulent or wilfully misleading:
(b)an offence under any of the Inland Revenue Acts:
(c)a shortfall penalty assessed under this Act, the Tax Administration Act 1994, or the Goods and Services Tax Act 1985 (but not an assessment that is later cancelled):
(d)an objection, challenge, or appeal that is inconsequential or frivolous:
(e)a matter arising under the Goods and Services Tax Act 1985 to the extent to which it relates to a taxable activity that does not constitute a business for the purposes of this Act.
Definitions for this section
(3)In this section,—
goods and services tax payable—
(a)means an amount of goods and services tax calculated under sections19 to 19D and section20 of the Goods and Services Tax Act 1985; and
(b)includes—
(i)an amount refundable under those sections; and
(ii)an amount referred to in sections17(2) and 27(6) of that Act
taxable activity has the meaning given to it by section6 of the Goods and Services Tax Act 1985
taxable period has the meaning given to it by section 2 of the Goods and Services Tax Act 1985.
Link with subpart DA
(4)This section supplements the general permission and overrides the private limitation and the employment limitation. The other general limitations still apply.
Origin:(1) DJ 5(1).
(2) DJ 5(3).
(3) DJ 5(4).
(4) new.
Defined terms:amount, business, deduction, employment limitation, general limitation, general permission, goods and services tax payable,income tax liability, income year, incurred, Inland Revenue Acts, person, private limitation, return of income, taxable activity, taxable period.
Comment:Expenditure remains deductible in the income year in which it is incurred, even if the expenditure relates to another income year. However, the direct timing rule to that effect, contained in the opening words of current section DJ5(1), has been omitted, because the timing is sufficiently addressed by the general ‘incurred’ timing rule in draft section BD4(2) (Allocation of deductions to particular income years).
Draft subsection(1)(a) now refers to the calculation of income tax liability as well as the determination of liability. This is consistent with the principles of self-assessment and brings the provision into line with the language already used in draft section BB2(1) (Principal obligations).
Current section DJ5(2), which provides that reimbursements and recoveries of amounts previously allowed as a deduction under sectionDJ5 are income, has been rewritten as section CG4 (Recovered expenditure: determining tax liabilities).
DB4Chatham Islands dues
Expenditure on dues
(1)A person is allowed a deduction for expenditure incurred on dues that are levied under the Chatham Islands Council Act 1995 relating to goods that the person uses in connection with carrying on a business.
Allocation of deduction
(2)The deduction for the expenditure is allocated to the income year in which the dues are paid.
Cost of goods
(3)Expenditure to which subsection(1) applies must not be taken into account in calculating the cost of the goods for the purpose of any deduction relating to the goods.
Link with subpart DA
(4)This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.
Origin:(1) DJ 3(1).
(2) DJ 3(1).
(3) DJ 3(2).
(4) new.
Defined terms:business, capital limitation, deduction, general permission, general limitation, income year, person.
Comment:The reference in current section DJ3(1) to the Chatham Islands County Council Empowering Act 1980 is obsolete and has been omitted. The timing rule in current section DJ3(1), which allocates the deduction to the income year in which payment is made, has been isolated and is now expressed in a separate subsection(2).
Financing costs
DB5Transaction costs: borrowing money for use as capital
Cost of borrowing money
(1)A person is allowed a deduction for expenditure incurred in borrowing money that is used as capital in deriving their income.
Link with subpart DA
(2)This section overrides the capital limitation. The general permission must still be satisfied and the other general limitations still apply.
Origin:(1) DJ 11.
(2) new.
Defined terms:capital limitation, derived, general limitation, general permission, income, incurred, person.
Comment:Current section DJ11 allows a deduction for both financing costs and property leasing costs. The financing costs element has been isolated and is now expressed in this separate section, grouped with other financing cost provisions.
DB6Interest
Interest
(1)A person is allowed a deduction for expenditure that they incur on interest.
Link with subpart DA
(2)This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.
Origin:(1) DD 1(b).
(2) new.
Defined terms:capital limitation, general limitation, general permission, interest, person.
DB7Repayment of debt sold at discount to associate of debtor
Repayment of debt
(1)When section EH57(6)(b) (Income and deduction when debt sold at discount to associate of debtor) applies, the debtor is allowed a deduction for the amount quantified in that subsection.
Link with subpart DA
(2)This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.
Origin:(1) EH 53(1), (7).
(2) new.
Defined terms:amount, associated person, capital limitation, deduction, general limitation, general permission.
DB8Money borrowed to buy shares in group companies
Companies in same group
(1)Subsection(2) applies when companyA in a group of companies borrows money to acquire shares in companyB in the same group. Companies are treated as being in the same group of companies for an income year only if they are in the group at the end of the income year.
Interest
(2)CompanyA is allowed a deduction for the interest payable by it on the money borrowed.
Amalgamations
(3)Subsection(4) applies when—
(a)companyA in a group of companies borrows money to acquire shares in companyB in the same group; and
(b)companyB ceases to exist through a qualifying amalgamation; and
(c)both companies were members of the group immediately before the amalgamation.
Interest, when amalgamation occurs
(4)CompanyA is allowed a deduction, from the time when the amalgamation occurs, for the interest payable by it on the money borrowed.
Link with subpart DA
(5)This section supplements the general permission and overrides the exempt income limitation. The other general limitations still apply.
Origin:(1) DD 1(b)(iii), (iii) second proviso.
(2) DD 1(b)(iii).
(3) DD 3.
(4) DD 3.
(5) new.
Defined terms:amalgamation, company, exempt income limitation, general limitation, general permission, group of companies, income year, interest, pay, qualifying amalgamation, share.
Security arrangements
DB9Security payment
Loss generally
(1)Subsection(2) applies when—
(a)a person receives a security payment for a loss; and
(b)the person is not allowed a deduction for the loss under any other provision of this Act.
Loss
(2)The person is allowed a deduction for the loss quantified in section EH58(2) (Deduction for security payment).
Other loss
(3)Subsection(4) applies when—
(a)a person receives a security payment for a share loss within the meaning of section DB18 (Share losses); and
(b)the requirements of section DB18 are met; and
(c)the person is not allowed a deduction for the loss under any other provision of this Act.